Selling Your Business for the Biggest Profit - Part 5
June 2004
The Sales Process As A Whole
Last month's CFO Selections article, Determining What Your Business is Worth, reviewed a number of different valuation methodologies and the basic standards frequently used by buyers and appraisers. This month we will provide you with an overview of the sales process, and review the advisors and professionals used at various stages.
Staying on top of the process is critical to the successful completion of a sale. A business can stagnate or even falter once the sales process begins because owners and key managers become distracted from the day-to-day operations. This is the last thing you want to have happen at a business' crucial juncture. Therefore, your primary responsibility is to stay focused on your business, and let your advisory team lead and manage the sales process.
Your advisory team should prepare a complete, comprehensive plan for negotiating the sale of your company prior to contacting potential buyers. Expectations regarding a fair sales price, buyout terms and conditions as well as personal preferences (such as your willingness to stay on after the sales and under what conditions) will need to be resolved. It is important to understand that it's your advisory team's responsibility to bring qualified buyers to the table. Only negotiate with pre-qualified prospects?people who have read your sales prospectus (the book) and signed a non-disclosure agreement. Once prospective buyers have reviewed your book, are pre-qualified and indicate specific interest, then the face-to-face portion of the process can begin.
The next step in the process is to schedule a meeting with the interested buyer. The purpose of this initial meeting is to accomplish two goals:
To answer any questions the buyer has and arrange to show him or her your business location, products, and operation;
To verify that you are comfortable, given their goals and objectives, to proceed in negotiations with them. The meeting should be kept confidential so that your employees, customers and vendors do not become overly concerned.
During the course of selling a business, it is predictable that you will get a lot of "tire kickers." They won't really be interested or qualified in buying your business and can waste a lot of your time. They may also be in a reconnaissance mode for their own business interests. You need to be able to quickly determine a prospect's seriousness so that the energy you put into discussing the business isn't entirely fruitless. After all, your first priority is to concentrate on running your business.
After you've given the prospective buyer a closer look at the company, ask if the buyer needs additional information. If your book was well prepared, you will have addressed most of the buyer's initial questions. If the buyer is still interested at this point, it's appropriate to ask for an offer. If they are serious about purchasing your business, they will make a written proposal that is usually referred to as a letter of intent (LOI) or letter of understanding (LOU). If the prospect is not interested at this point, he or she will decline to make an offer.
Once a buyer makes a written offer, then it is time to begin the negotiation. Your advisory team plays an important role in negotiating the selling price and terms of the deal. It is best to have your financial, legal, and business advisors carefully review the buyer's written offer. Consider all aspects of the offer, not just the sales price and payment terms. If appropriate, prepare a counter-offer. As most veteran business people will tell you, most deals are signed only after several rounds of negotiations.
Once the initial details of the deal have been finalized, sign the letter of intent. The LOI ensures that the major terms of the sale are in writing and documents the additional activities that need to be completed prior to signing a purchase agreement. Both parties sign the letter and agree to give the other party a chance to investigate the transaction.
Be careful of the legalities. The LOI is not a sales contract; it is only a commitment to pursue the sale. It legally binds the buyer to keep the negotiations confidential. It also prohibits the seller from showing the LOI to other prospective buyers in hopes of influencing them to make a better offer.
Due diligence usually follows the LOI stage and is the detailed examination of the business, its records, and results. It is the phase of the selling process in which the buyer investigates the financial and legal aspects of your business. It is the buyer's responsibility to investigate and understand the business they are buying. It is the seller's responsibility to provide and disclose information requested about the business and to make supporting documents available for review. Clear, honest and straightforward communications during the due diligence process are critical to minimizing post-sale liability risks.
One of the final steps is the drafting of the purchase agreement. It is prepared by the buyer's attorney and reviewed by yours. This is the final process of the negotiations. This agreement spells out the "fine print" of the deal and will be the controlling document that details your price, payment terms, and post-sale responsibilities as well as any specific terms and conditions that were negotiated. This is where the legal professionals on your team will take the lead.
As you work through the sale of a business, it's helpful to know some of the most common mistakes that sellers usually make. They are:
Trying to sell the company yourself
Unrealistic business value expectations
Contacting too few or too many potential buyers
Overstating company results and/or potential
Hiding a major problem or liability
Waiting for better future earnings
Ignoring the potential tax implications of the sale
Not fully understanding the sale agreement, its terms, and conditions
Selling a business is a complex undertaking that takes many months of hard work but can be accomplished by utilizing a team of specialists skilled in the areas of finance, law, tax, and the art of negotiations. By avoiding the classic mistakes and letting your advisory team lead you through the process, you will significantly increase the chances of closing the sale successfully and profitably.
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